Regulating Fannie and Freddie

[Banquo's Ghost]

So how exactly do we regulate this market thingy to make it work in the interest of policy goals that society considers necessary or desirable, but without impeding either fairness (i.e. fair competition) or the profit motive of market parties?

A challenging thread, indeed.

My own view is that we are regulating the wrong things, in the main. That is to say, I would offer that markets become most disfunctional when two attributes remain unregulated: size and accountability.

A market works best when its processes are transparent to most. Whilst markets will always have the characteristic of the herd, when sufficient knowledgeable traders participate, there will be many views to follow and/or shape the market behaviours.

Nowadays, we have vast and globalised corporations driving all markets. Not only these organisations specifically protected by outdated laws from the consequences of risk, they create monopolies (or small oligopolies) through obfuscation. In simpler terms, they change the rules to suit themselves and confuse others.

The modern drive for privatisation has also created the chimerae oft in charge of essential utilities. These are de facto monopolies - the illusion of choice has been created but in reality, they either operate as cartels or as actual monopolies. This has been done on the basis of a now unchallenged article of faith: private sector good, public sector bad. Both being organisations of people, there is no inherent reason why this should be so. As it suits politicians to have scapegoats, the past thirty years have shown a preference for divesting responsibilites to the private sector - and as the sweetener, a blind eye turned to the consequent profiteering; only sometimes overseen by a toothless regulator. Certainly the public sector in most countries had atrophied to the point of calcification - but surely the solution was to bring appropriate incentives and management to bear, rather than vilify and unload essential services?

Monopolies make a mockery of markets. They rapidly become as lazy and calcified as the publicly owned facilities they were meant to replace. Often, as they approach failure, they cannot be allowed to embrace it, and the taxpayer ends up securing not only the original costs but propping up the profiteering as well. A truly Faustian bargain, but we do so love it.

There is also the crisis of modern conservatism. To me, a conservative is one who values traditional values and the concept of duty. There is also a healthy distrust of government where unneeded, but a recognition of the important role of the state in ensuring all can go about their business. Developing a business requires stability, and an equal opportunity for good ideas to flourish within the rule of law. Unfortunately, my kind of conservatism is long dead. This who style themsleves so these days cling to the singular idea that government is always bad - and the tragic corollary which is therefore, private is always good. Instead of a functioning market, they require only the semblance of a market, unblemished by state intervention. As modern socialism finds itself unable to break free of the desire to intervene in every aspect of the citizen's life, its ascendant shadow strives to intervene not at all.

As noted, markets cannot function without law. Yet incorporation removes (in most countries) a great deal of the burden of law from the compnaies so constituted. Corporations are in law, individuals, but individuals free from prosecution in so many instances because the actual individuals (the human ones) are not, in law, often culpable.

This goes further to the nub of accountability. If one starts a small business, and it fails, one is likely to lose a great deal - including perhaps the house you used to secure the initial loan. Bankruptcy and ruin lurk in one's shadows. This is real risk, with real consequences, and the successful deserve their success. Yet above a certain size - and incorporated - one can risk an unimaginable amount of money, even to ruination of the company, yet leave the scene of destruction with a handsome payout - and invariably a new post running another company.

Clearly something is wrong. Risk does not carry accountability in these rarefied atmospheres, and consequently the market does not work on the men and women employed therein. This has been seen most acutely in the current banking crisis. Financial derivatives - essentially new games of chance concocted by people who hope that no-one else will understand the rules - have grown in such complexity and idiocy that often even their creators lose track of what they are doing. The really clever see far more reward in the stock exchange casinos than in the mundane business of regulation, so whilst even other financiers are struggling to understand what is going on, the poor bumbling non-entities left to regulatory duty are way beyond their depth. Let's not even consider the inadequacy of the functional illiterate that is invariably wasting space as Finance Minister.

Small is beautiful, as a wise fellow* once wrote. We should get rid of the concept of chartered or incorporated status ('twas instigated by Elizabeth I as a method to legitimise piracy by her favourites, and has trod that bountiful path all the days since).

We should utilise law (and international law for a globalised market, which is a whole new subject) to set the stable boundaries for business. We must recognise the essential and noble duty of government to enforce that law (and the enormous contribution that the state makes to ensuring business can flourish, such as EA noted in another thread, i.e. picking up the social costs of their decisions - for which, it should be noted, most corporations repay the state by avoiding the majority of their taxes).

Company bosses should be personally liable for all losses incurred by the company - if this leads to the hoary old complaint that no-one will do the job, then so much the better. Corporations will wither. I can assure such complainers that many small entrepreneurs, always willing to take such risk, will fill the gap and competition and innovation will once again flourish.

Essential services should be taken back into public ownership and the concept of public service as a high calling re-established - through draconian culling of the current incompetents, and implementation of the best of organisational theory - including imposing accountability on public servants.

Fannie Mae and Freddie Mac are exemplars of pretty much every wrong-headed characteristic of business I have excoriated above. No wonder they are crumbling. Yet we will soon forget as the masses are given more shiny things to distract their attention. I would have the responsible politicians and board members stripped of everything they own and made homeless in the same curt manner as those dumb proles they conned; pour encourager les autres, you understand - and we just might see the beginnings of a real functioning market economy.

Spoiler Alert, click show to read: 

E.F. Schumacher, in case anyone is interested in his essay of the same name.

What sort of regulation, and what sort of oversight are needed? This is not just a Socialist issue. Every modern world view from Libertarianism to Catholic Restauration is confronted with it, because every world view presupposes some sort of regulation of economic life, preferably one that works in the interest of their preferred type of society.

Catholic Restauration is a new one, I must admit. Is that the movement where bistros serve bread that one is told earnestly is really something else?